Volume Title: International Trade in East Asia, NBER-East Asia Seminar on Economics, Volume 14 Volume Author/Editor: Takatoshi Ito and Andrew K. Rose, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-37896-9 Volume URL: http://www.nber.org/books/ito_05-1 Conference Date: September 5-7, 2003 Publication Date: August 2005
Title: The Effects of Financial Crises on International Trade Author: Zihui Ma, Leonard Cheng URL: http://www.nber.org/chapters/c0196
8 The Eﬀects of Financial Crises on International Trade
Zihui Ma and Leonard K. Cheng
8.1 Introduction The world suﬀered three major ﬁnancial crises in the last ten years, namely, the European Monetary System (EMS) crisis in 1992–1993, the Mexican crisis in 1994–1995 (which spread to a number of South American countries), and the Asian crisis in 1997–1998. Economists usually believe these crises were the results of weak economic fundamentals, for examples, declining foreign reserve, increasing foreign debt, capital account and current account deﬁcits, ﬁscal deﬁcit, and so on. Obviously, a current account deﬁcit can be a very important factor because, other things being equal, it increases foreign debt, decreases foreign reserves, and weakens conﬁdence in the exchange rate of the domestic currency. Almost all countries that suﬀered ﬁnancial crises had faced rising current account deﬁcits before the crises occurred. So such deﬁcits are widely regarded as an important factor of ﬁnancial crises. International trade links play an important role in the so-called contagious eﬀect, that is, a crisis in one country causes a new crisis in another country with relatively good fundamentals. Glick and Rose (1999) provided some analysis of the relationship between trade and contagion, while Zihui Ma is lecturer of international economics at Renmin University of China. Leonard K. Cheng is professor and department head of economics at the Hong Kong University of Science and Technology. We thank Chin Hee Hahn, Kozo Kiyota, Andrew Rose and other seminar participants at the Fourteenth NBER-East Asia Seminar on Economics for helpful comments and suggestions. The work described in this paper was substantially supported by a grant from the Research Grant Council of the Hong Kong Special Administrative Region, China (Project no. HKUST6212/00H).
Zihui Ma and Leonard K. Cheng
Forbes (2001) went further to construct some statistics measuring the importance of trade linkages in transmitting crises. Because most economists agree that international trade is one of the important factors in explaining ﬁnancial crises, it seems natural and logical to ask the reverse question: what are the eﬀects of ﬁnancial crises on international trade? Surprisingly, little research on this subject has been done. Perhaps the reason is that the answer appears to be obvious. Conventional wisdom would predict that a ﬁnancial crisis, by bringing about a recession in the macroeconomy, would lead to a drop in imports. Exports, however, may rise because of both a decline in domestic demand and a devaluation of the domestic currency. A weakening or collapse of the ﬁnancial system, in particular the banking system, however, might weaken the country’s export capability. So the aggregate eﬀects of a ﬁnancial crisis on the macroeconomy are unclear. This paper tries to ascertain whether the ambiguity can be resolved empirically. We divide all the past ﬁnancial crises into two types: banking crises and currency crises. These two diﬀerent types of crises had diﬀerent attributes and diﬀerent eﬀects on international trade. This paper begins by analyzing theoretically the eﬀects of banking and currency crises on international trade. Then it uses bilateral trade data, macroeconomic data, and geographic data to test the theoretical predictions. Overall, the empirical results provide support...